How To Set Up A Trust In Virginia

Trusts and Estates

A Section of the Virginia Country Bar.

Funding Revocable Living Trusts For Single Clients

Newsletter - Trusts and Estates

Book 14, No. 2

FUNDING REVOCABLE LIVING TRUSTS FORSINGLE CLIENTS

By MARTHA LEARY SOTELO
DONNA ESPOSITO FINCHER
PATRICK J. VAUGHAN

You lot have been profitable Joan Brown, a retired widow, age 68, with her manor planning arrangements. Joan has two children, each of whom has two teen-age children. She has a cyberspace worth of $900,000. Her principal goals are to avert probate complications, preserve family unit privacy and streamline the settlement of her affairs in the event of her incapacity or death. On your advice, Joan has executed manor planning documents consisting of a revocable living trust (which includes a continuation trust for the benefit of her grandchildren if either or both of her children do not survive her), a cascade-over will, a durable full general power of attorney and an accelerate medical directive. Joan and her eldest kid, Jack, are serving as Co Trustees of her trust, with either of them having the ability to human activity independently. Joan has asked for your recommendations on how to retitle her avails to properly fund her revocable living trust.

To: Joan Brown

Now that you have executed your estate planning documents, you should fund your revocable living trust to maximize its usefulness as a vehicle to manage your avails in the event of your incapacity, avoid probate and preserve your privacy. Since yous are serving as one of the Trustees of your trust, the proper employer identification number for your trust is your social security number.

Beneath you lot will observe the following:

I. Schedule of Your Assets Before Funding Trust

II. Retitling Recommendations

Iii. Schedule of Your Assets Later Funding Trust

Assets are titled as follows:

(1) In Joan's proper name individually

(2) Beneficiary designation: Children

II. RETITLING RECOMMENDATIONS

Checking Accounts

You should continue to ain your checking account in your individual name. Irresolute the championship of your checking account volition complicate the directly deposit arrangements y'all presently have for your pension and your government benefits. You should, withal, inquire your bank for a Pay on Expiry ("P.O.D.") card and designate your trust equally the beneficiary of this account. By designating the trust as the P.O.D. beneficiary of the account, you will ensure that the account avoids probate on your death. The appropriate wording for designating your trust as the P.O.D. beneficiary is as follows:

Trustees of Joan Brown Trust dated March 18, 1998.

Certificates of Eolith

Y'all should fund your trust with your certificates of deposit ("CDs"). 1 option is to retitle the CDs into your trust past completing new signature cards which change the title to you and your son every bit trustees of your trust. A 2nd pick is to designate your trust as the P.O.D. beneficiary. The appropriate wording for retitling your CDs to the trust is every bit follows:

Joan Brown Trust dated March 18, 1998, Joan Brown and Jack Brown, Trustees, either of whom may act independently.

The appropriate diction for designating your trust equally the P.O.D. casher of the CDs is the same equally for designating your trust as the P.O.D. beneficiary of your checking business relationship.

Please note that before yous change the title to your CDs, yous should ask the banking concern whether the change in title will trigger whatsoever penalties. If and so, you should wait until the CDs mature before retitling to your trust.

U.Southward. Savings Bonds

With respect to your savings bonds, you should either designate your trust equally the beneficiary or transfer the bonds to your trust.

If yous decide to retitle the bonds to your trust~ you will not exist required to recognize the accrued income upon retitling because such a transfer is not considered a disposition of the bonds for income tax purposes.^one

Stock and Bonds

Your stocks and bonds should exist transferred into your trust.^two Yous take a brokerage business relationship which holds the bulk of your securities. You besides hold a few stock certificates outside of your brokerage business relationship.

With regard to your brokerage account, y'all should contact your broker and instruct him or her to institute a new account in the name of your trust. Your broker will probably want to run into certain pages of your trust in club to verify the trust is valid, to ascertain the trustees and to determine the extent of the trustees' powers. Your broker volition send y'all whatever paperwork is necessary to establish the new account. Your broker will take intendance of transferring the stock and bonds from your existing account to the new account in the name of your trust.

You lot have 2 options with respect to retitling the stock certificates that are not in the brokerage business relationship. Y'all can contact the transfer agent for the stock to request a new certificate in the proper noun of your trust, or you can transfer these stocks to your banker to be held in the new brokerage account in the name of your trust and allow your banker handle retitling. If you contact the transfer agent straight, you will bear the responsibleness for making sure the new stock certificates are issued properly. Like your banker, the transfer agent volition probably want to come across sure pages of your trust in order to verify that the trust is valid, to ascertain the trustees and to decide the extent of the trustees' powers.

The appropriate diction for retitling your brokerage business relationship and the stock certificates is:

Joan Brownish Trust dated March 18, 1998, Joan Brown and Jack Brown, Trustees, either of whom may act independently.

Mutual Funds

You lot should transfer your mutual funds into your trust. If your mutual funds are held in your brokerage account, you should contact your banker and instruct him or her to transfer your holdings into the new brokerage account in the name of your trust. Your banker volition send you lot any paperwork necessary to complete the transfer.

If you deal directly with the transfer agent for your mutual funds, you should asking the transfer agent to retitle the mutual funds into the name of your trust. The transfer agent will probably want to run into certain pages of your trust in order to verify that the trust is valid, to define the trustees and to decide the extent of the trustees' powers under the trust.

The appropriate wording for retitling your mutual funds is the same as for retitling your stocks and bonds.

Partnership Interest

You own a fifteen percent interest equally a limited partner in a limited partnership. You should transfer .this involvement into your trust. Your partnership understanding requires the general partner to approve whatsoever transfer of your partnership interest. You. should contact the full general partner of the limited partnership and request his or her assistance in assigning your limited partnership involvement to your trust.

The advisable wording for the assignment of your partnership involvement is:

Joan Brown Trust established March 18, 1998, Joan Dark-brown and Jack Brown, Trustees, either of whom may act independently.

Installment Note

Five years ago you sold appreciated holding and financed a substantial portion of the purchase price. The buyer signed a promissory note like-minded to pay the loan back over 15 years. You are the payee of the annotation. Yous should transfer your interest in the installment note to your trust.

The appropriate wording to endorse the installment note to your trust is: Pay to the order of Joan Brown -Trust established March eighteen, 1998, Joan Brownish and Jack Brown, Trustees, either of whom may human action independently.

After y'all insert this wording, you lot should sign and appointment the endorsement.

Virginia Residence

Your residence is encumbered by a $ten,000 mortgage. Information technology is our understanding that you do non intend to refinance this mortgage nor obtain a dwelling disinterestedness loan in the near time to come. Nether federal constabulary, you may retitle your residence to your trust without whatsoever chance that your lender may practice its option under the due-on-sale clause as long as you remain the casher of the trust and go along to occupy your residence.ⁱⁱⁱ

Since you accept no intention of refinancing or obtaining a home equity loan on your residence, we recommend that you execute a new deed retitling your residence to your trust. The transfer of your property to your revocable living trust volition not trigger any transfer taxation in Virginia.⁴ The transfer of the belongings to your trust will have no impact on your ability to exercise the $250,000 majuscule proceeds exclusion for single persons who accept resided in their homes for two out of the last five years.^five

Delight annotation that if you have any plans to refinance your residence mortgage or to encumber the residence with a abode equity loan, nosotros exercise not recommend retitling your dwelling house to your trust. Lenders are often reluctant and sometimes even refuse to make a loan secured by property which is titled to a trust. Even if the lender does not reject to brand the loan, the lender will impose boosted requirements before like-minded to the loan which will complicate settlement. Accordingly, for individuals who wish to refinance their residence or obtain a home disinterestedness loan, nosotros recommend that championship to the holding be maintained in their private names.

Delaware Embankment House

At this time, your beach house is free and clear of any mortgage. If y'all exercise not intend to mortgage the holding in the future, you should execute a new deed transferring title to the belongings to your trust. By transferring title to the property to your trust now, your estate will not accept to undergo ancillary probate proceedings in Delaware with respect to this belongings.

You lot should contact an chaser in Delaware (or if you prefer, we volition contact a Delaware chaser) to help in the grooming of a new deed. A Delaware attorney should prepare the new human activity to ensure compliance with Delaware law and to ascertain any taxation consequences resulting from the transfer.

If y'all intend to mortgage your Delaware beach firm, we recommend that you exercise not transfer the belongings into your trust until later on you lot obtain the mortgage. As mentioned above, lenders are often reluctant and sometimes even pass up to grant a loan confronting property which is endemic by a trust. If you use the beach house only for your personal purposes, y'all can transfer the holding to your trust afterwards you obtain the mortgage without requesting the lender's approval.^{half dozen} If y'all use the beach firm as a rental belongings, you must obtain the lender's approval before retitling the property to your trust. Failing to obtain the lender'southward approval before retitling rental belongings to your trust could issue in the lender exercising its option under the due-on auction clause.

Life Insurance

For any life insurance policy insuring your life, y'all should be the possessor of the policy and your trust should be designated equally. the casher of the policy upon your death as follows:

Trustees of Joan Dark-brown Trust dated March 18, 1998.

If a life insurance company requires you to identify the specific trustees, identify the trustee(due south) who volition serve following your expiry.

Designating your trust (rather than your children) as the beneficiary of your life insurance policy volition ensure that your children or other beneficiaries will receive the proceeds in accordance with the trust arrangements y'all have fabricated on their behalf.

IRA (Traditional)

With a traditional IRA, a person can extend the payout from the IRA over the articulation life expectancy of himself or herself and a designated beneficiary. A designated casher is an individual (including a casher named under an irrevocable trust or nether a revocable living trust which becomes irrevocable upon the person's expiry).⁷ Y'all may name your children or your revocable living trust (which names your children as your primary beneficiaries) as the casher of your traditional IRA. The advantage of naming your trust as the casher is that if either or both of your children predecease you, your grandchildren will receive their parent's share in accordance with the trust . arrangements you accept made on their behalf.

Designating your children (or your revocable living trust) equally the beneficiary of your traditional IRA will enable y'all to minimize, to the extent possible, the size of the distributions that you will receive from your traditional IRA. One time you reach the required start date for receiving distributions from your traditional IRA (April 1 of the agenda year following the calendar twelvemonth in which you accomplish the age of seventy~), yous tin can elect to have the distributions calculated based on the joint life expectancy of you lot and your children.^viii In so doing, you lot can reduce the amount of distributions yous will receive from your IRA each year, thereby deferring the recognition of income taxes.

IRA (Roth)

Since whatever distributions you receive from your Roth IRA are not taxable to you every bit income,^nine the considerations discussed in a higher place in retitling a traditional IRA practice not apply to your Roth IRA. Thus, we recommend that you designate the trustees of your trust every bit the beneficiary of your Roth IRA every bit follows:

Trustees of Joan Dark-brown Trust dated March 18, 1998.

In designating your trust equally the casher of your Roth IRA, you lot volition ensure that if either or both of your children practise not survive you lot, your grandchildren will receive their parent's share of the proceeds from the Roth IRA in accordance with the trust arrangements you have fabricated on their behalf.

Tangible Personal Holding

Y'all should assign title of your tangible personal property (eastward.g., clothing, jewelry, household goods, personal effects and automobiles) to your trust. Nosotros will be happy to set up such an assignment for you. In accordance with the provisions of your trust, you should write a letter of instructions to your trustee indicating how yous would like specific items (not otherwise specifically ancestral) distributed upon your expiry.¹⁰ This letter must describe the items and intended beneficiaries with reasonable certainty and be signed by you. You may alter or amend this letter of instructions at any fourth dimension without having to modify your trust agreement.

CONCLUSION

We strongly encourage you to retitle your assets in accordance with the recommendations set forth higher up, in order to fully maximize the usefulness of the estate planning documents we prepared for y'all. Please notation that yous will not endure whatever adverse income tax consequence as a result of the retitling since you will exist considered the possessor of the assets held by your trust during your lifetime. Any income you receive from such assets will be reported on your individual income tax return.

Recommended Retitling Measures:

(1) No change.

(2) Retitle in name of trust.

(3) Designate trust equally P.O.D. beneficiary.

(4) Establish brokerage account in the name of trust.

(five) Assign to trust.

(6) Deed property to trust.

(7) Designate trust as casher.

Patrick J Vaughan, J.D., CPA, ChFC, is a principal in the McLean, Virginia police force house of Adams, Porter & Radigan, Ltd., where he specializes in estate planning, estate administration, and fiduciary litigation.

Donna Esposito Fincher, J.D., CPA, is a master in the McLean, Virginia constabulary firm of Adams, Porter & Radigan, Ltd. where she specializes in estate planning, estate administration, and fiduciary litigation.

Martha Leary Sotelo, J.D., is an associate at the McLean, Virginia law firm of Adams, Porter & Radigan, Ltd., where she specializes in manor planning, estate administration, and, fiduciary litigation.

Endnotes

i. Rev. Rul. 58-2,1958-1 CB 236

two. The Uniform Transfers On Decease (TOD) Security Registration Human activity, Va. Code Ann. Sec. 64.1-206.1 et. seq., allows for securities to be transferred upon expiry past a beneficiary designation. While Ms. Brown may use a transfer on death designation to avoid probate of her stocks and bonds, we recommend that her stock and bonds be transferred to her trust so that if she becomes incapacitated earlier death her co-trustee tin meliorate manage those avails for her.

iii. Gam-St. Germain Depository Institutions Act of 1982. Pub. 50. No. 97-320; 96 Stat. 1469; 12 United states of americaC. Department 1701j-3(d)(viii); 12 CFR Section 591.five(b)(1 )(vi).

iv. Va. Code Department 58.1-811 (12).

5. Run into Internal Revenue Code Sec. 121 ( every bit amended by 1997 Taxpayer Relief Act) and Priv. Ltr. Rul. 8006056; Priv. Ltr. Rul. 8007050; Priv. Ltr. Rul. 8025027 (interpreting previous Code Sec. 121).

half-dozen. Gam-St. Germain Depository Institutions Act of 1982. Pub.,L. No. 97-320; 96 Stat. 1469; 12 U.South.C. Department 1701j-three(d)(eight); 12 CFR Section 591.5(b)(1)(vi).

7. The Internal Revenue Service recently issued revised Proposed Regulations regarding the criteria for designating a trust as the beneficiary of an IRA. Revised Prop. Treas. Reg. Section one.401(a)(ix)-I. The revised Proposed Regulations modify Section 1.401(a)(ix)-I) of the Treasury Regulations to allow the beneficiaries of a revocable living trust to be treated as a designated beneficiary of the IRA if: (i) the trust becomes irrevocable upon the employee's death; (ii) the trust is valid under state law; (iii) the beneficiaries of the trust are identifiable and; (four) a copy of the trust agreement is provided to the plan administrator or certain trust certification requirements are satisfied.

viii. Since Ms. Brown has more than one beneficiary, the beneficiary with the shortest life expectancy, not to exceed 10 years, will exist calculated along with her life expectancy. Prop. Treas. Reg. Section 1.401(a)(9)-fifty(E) Q&A E-5, and Prop. Treas. Reg. Department one.401(a)(g)-2 Q&A vi.

9. See Internal Acquirement Lawmaking Sec.408A (added past 1997 Taxpayer Relief Act Section 302(a)).

x. In 1997, Virginia Lawmaking Section 55-seven.ii was enacted to permit a trust to comprise by reference a written statement or list executed earlier or after the execution of the trust which disposes of specific items of trust tangible personal property.